The National Australia Bank has decided to bite the bullet and call those US mortaged-back securities WORTHLESS and wrote them off by 90 per cent of their original value. What happens if other banks follow suit and declare their mortgaged-backed "assets" equally WORTHLESS? As commentator Mike Whitney says, "The big-hand just inched a little closer to midnight."

July 28's trading on the New York Stock Exchange (NYSE) was a real humdinger.
It started off with the White House announcing that this year's fiscal deficit
would soar to a new record of nearly US$500 billion. That was followed by news of
rising oil prices, weak quarterly earnings and a slowdown in consumer spending.
Plunk, plunk, plunk; one domino after another.
By mid-morning the markets were
in full retreat.

That's when investment giant Merrill Lynch announced that it
would notch a $4.6 billion second-quarter loss and write-downs of $9.4 billion
on collateralized debt obligations (CDOs) and other mortgage-related assets.
That's when the dookie really hit the fan. Stocks quickly went verticle and the
rout was on. By the closing bell the Dow was down 240 points. Traders staggered
from the floor of the exchange slumped-over and bedraggled looking like they just
got a missive from the draft board. The optimism is being wrung from the
markets faster than the credit at an over-levered hedge fund. Every day brings
another dismal surprise.

And, yet, on Tuesday, the market
staged a valiant comeback surging 260 points in a matter of hours. It was
enough to give the fund managers a bit of a lift and hope that things are
finally turning around. But the market's woes are far from over. They're deeply-rooted and spreading like Kudzu throughout the
system. The International Monetary Fund summed it up in warning they issued
earlier in the week:

"Global financial
markets are 'fragile' and indicators of systemic risk remain
'elevated'... Credit quality 'across many loan classes has begun to deteriorate
with declining house prices and slowing economic growth.' Bank balance sheets
are under 'renewed stress' and the decline in bank share prices has made it
more difficult to raise new capital. (There is an) 'increased likelihood of a negative interaction between banking system adjustment and the
real economy'." (Financial Times)

The IMF also stuck by its
earlier prediction that total losses to financial institutions from the credit
crisis would reach $1 trillion ($945 billion), a sum that will have devastating
consequences for industry, consumers and the global economy. Tuesday's festivities
on Wall Street are likely to be short-lived. It's just a one-day lull in the
storm.

Merrill Lynch said it "will provide financing to the
purchaser for approximately 75 per cent of the purchase price." Whoa. In other
words, the banks are so anxious to off-load their junk-paper, they're almost paying people to take it off their hands. Now that's
desperation!

Over at Nouriel Roubini's
blog, Dr. Doom made this observation about the Merrill Lynch's troubles:

"Merrill Lynch's
decision to 'sell' a good chunk of its remaining CDOs at 22 cents to the dollar
has been widely praised as the firm finally recognizing the full extent of its
losses on these toxic instruments. This batch of $30.6 billion of CDOs was
already marked down to $11.1 billion. Now with the 'sale' of it to Lone Star at
a price of $6.7 billion Merrill Lynch is taking another $4.4 billion write-down
and 'selling' it at 22 per cent of the original face value. But is this a market-based
'sale'? No way, calling this transaction a 'sale' is a joke." (Nouriel
Roubini's Global EconoMonitor)

This isn't a
"sale"; it's more like abandoning a sinking ship. The investment
chieftains are getting scorched by their downgraded assets and have started
dumping them at any cost. There's no market for mortgage-backed anything now,
and there won't be until housing finds a bottom. By the time that happens, most of
the CEOs and CFOs in the mega-brokerage houses will be squatting on
streetcorners on the lower East Side with tin-cup in hand. It's that bad.

The Merrill Lynch deal
illustrates just how crazy things have gotten. Merrill said it "will provide financing to the
purchaser for approximately 75 per cent of the purchase price." Whoa. In other
words, the banks are so anxious to off-load their junk-paper, they're almost paying people to take it off their hands. Now that's
desperation! No wonder
the market is snorkeling its way to the bottom of the fishbowl. The problems
haunting the financial markets have cross-pollinated with the real economy and
are spreading misery everywhere.

Unemployment is rising, growth is slowing,
inflation is up, the dollar is down. We've heard it
many times before, but it's still jarring to see General Motors stock fall
below Bed & Bath, or Starbucks shut down 600 stores, or million dollar
McMansions sell for $425,000, or millions of middle-class families join the
food stamp rolls. That's tragic no matter how you slice it.

The scariest news of the week
comes from down-under, where the National Australia Bank (NAB) announced it
would "slash a £400m bond sale by two thirds. The retreat comes days after
the Melbourne lender shocked the markets by announcing a 90 per cent write-down on its
£550m holdings of US mortgage debt, an admission that it AAA-rated securities
are virtually worthless...

Now that the working stiff is
maxed out on his mortgage, worried about losing his job, and trying to keep
food on the table; the least congress can do is scatter the oil speculators;
right?

Wrong. On Monday, the
Financial Times reported that: "A US Senate proposal designed to curb
speculation and increase transparency in the energy markets was blocked by
Republican legislators on Friday. The move frustrates Democratic efforts to
show the party is taking action on record petrol prices. The Stop Excessive
Speculation Act, sponsored by Harry Reid, the Senate majority leader, fell 10
votes short of clearing a procedural hurdle."

Unbelievable. $4.00 gasoline
and millions of consumers that are flat-broke and
congress still refuses lend a hand? What a scrubby band of sandbaggers.

The scariest news of the week
comes from down-under, where the National Australia Bank (NAB) announced it
would "slash a £400m bond sale by two thirds. The retreat comes days after
the Melbourne lender shocked the markets by announcing a 90 per cent write-down on its
£550m holdings of US mortgage debt, an admission that it AAA-rated securities
are virtually worthless... The decision by National Australia
Bank to make drastic provisions on its US mortgage debt could have
ramifications in the US itself. It opted for a 100pc write-off on a clutch of
"senior strips" of collateralized debt obligations (CDO) worth £450m
- even though they were all rated AAA. (Ambrose Evans Pritchard,
"Australia faces worse crisis than America", UK Telegraph)

This is a huge story with
grave implications for America's struggling banking system. No wonder the
establishment media is avoiding it like the plague. If AAA rated CDOs are
worthless, then some of the biggest financial institutions in the country will
be packed off to the boneyard feet-first.

The original article appeared
in the Business Spectator and was titled "NAB will shock Wall
Street", by Robert Gottliebsen. "Shock" is an understatement.
This is more like a meat cleaver crashing down on a butcher block. Schwook!
This is a must-read for anyone who is following the meltdown in the financial
markets.

If AAA rated CDOs are
worthless, then some of the biggest financial institutions in the country will
be packed off to the boneyard feet-first.

Here is an extended excerpt from Gottliebsen's article:

"The National Australia
Bank's decision to write off 90 per cent of its US conduit loans will have
dramatic repercussions around the world. Wall Street will be deeply shocked
when they understand the repercussions of what NAB has done. It is clear global
banks have nowhere near provided for their exposures to US housing loans which
in the words of John Stewart are experiencing a "meltdown".

"We are now way beyond
sub-prime. NAB says that it is suffering a 55 per cent loss on American housing
loans - an event that has never happened in the history of a developed country
in recent memory. This is an unprecedented event and means that the cost of
bailing out the US financial system is now far beyond the highest estimates. A
US recession is now locked in, but more alarmingly, 55 per cent loan losses
point to the possibility of a depression.

"It means the cost of
bailing out housing exposures to the two mortgage insurers will be so great
that it will leave no room to bail out anything else and there are several US banks
that are now in big trouble. NAB says that the dislocation in the residential
market is separate from the corporate market, but the flow on is
inevitable." (The Business Spectator,"NAB
will shock Wall Street")

The conduits are off-balance
sheets operations run by the banks which contain
hundreds of billions of dollars of bonds which are now essentially worthless.
So far, many of the banks have not accurately reported the losses from these
operations hoping that the housing market will stabilize and the value of the
bonds will rebound. The action taken by the National Australia Bank is a
"game-changer"; it's like the Grim Reaper swooping down on Wall
Street and lopping-off the top of every big investment bank in downtown
Manhattan.

Gottliebsen again:

"The global banks have
been marking to market the assets they held on their balance sheet, but the
vast amounts held in so called 'conduit trust accounts' have not been written
down because they were not marketable. NAB wrote them down when they saw the
bad mortgages....US banks have written down $450
billion in bad housing loans. The revelation from NAB means that they will now
certainly need to take provisions to $1,000 billion. But write-downs of $1,300
billion and perhaps even more are on the cards."

Tuesday's "sucker
rally" in the stock market was just the convulsive writhing of a dying
bull. It won't last. Once the bad news sinks in; investors will pull up stakes, equities will fall, and banks will crumble. The
big-hand just inched a little closer to midnight.

Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at fergiewhitney@msn.com.

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Judgment Week On Wall Street

Merrill Zigzag Makes Investors Uncomfortably Numb
Mark Gilbert writes July 31: And that US$4.4 billion that Temasek Holdings Pte Ltd, Singapore's sovereign wealth fund, invested in Merrill at Christmas? That backing turns out to be somewhat less than wholehearted, because Merrill is now paying Temasek US$2.5 billion in restitution for the stock losing half of its value this year.

"Call me naive, but if these investors take an ownership stake by buying Merrill shares, why do they get compensated if the price falls?" Bill Blain, who produces a daily market report for bond broker KNG Securities LLP in London, wrote this week. "I thought providing equity capital to banks meant I shared in their upside and downside. Can I have the same, please?''

That "heads we win, tails we don't lose'' twist somewhat tarnishes the ringing endorsement from Manish Kejriwal, Temasek's senior managing director for investments. He said on Dec. 26 that the deal was "a vote of confidence for the management team and the underlying strengths of Merrill Lynch's franchise.''

Votes of confidence don't typically come with just-in-case side agreements. I'm starting to think that when I die, I'd like to come back as a sovereign wealth fund.
Full report here.

$ingapore's Temasek Confirms Merrill Lynch Stake
July 29: $ingapore's state-linked investment firm Temasek Holdings, the largest shareholder in troubled US investment bank Merrill Lynch, confirmed on Tuesday it was increasing its stake. In a brief statement, Temasek said it "confirms its commitment of USS3.4 billion in the public offering by Merrill Lynch, a portion of which is subject to regulatory approval."
Full report here.

Merrill Relief Another
Illusion In Hall Of Mirrors?

July 30: U.S. bank stocks may
be staging another suckers' rally. The launchpad for this week's recovery in
financial sector shares was another huge $5.7 billion writedown from Merrill
Lynch, which was swiftly followed by what is fast becoming Wall Street's motto
in the year-long credit crisis: the worst is over. Not so fast, say skeptics,
who argue that Merrill's announcement actually contains the seeds of another
downturn in the credit markets.Full report here.

Merrill Lynch Offloads $31bn
Of Cheap CDOs

July 30: Battered US
investment bank Merrill Lynch has sold off a US$30 billion ($31.3 billion)
face-value tranche of toxic CDO mortgage assets to Texan group Lone Star Funds
for $US6.7 billion, dumping them for the equivalent of 22c in the dollar,
financing 75 per cent of the knockdown purchase price and taking a write-down
of $US4.4 billion.
Full report here.